According to rational choice theory, people will choose their careers, level of work
effort or investment based in part on their expectations of success. But are people’s
expectations of their likelihood of success accurate? Evidence accumulated by
psychologists suggest that on average people underestimate their risks and
overestimate their abilities relative to others. We test for such optimistic bias in
experiments where people must predict their relative or absolute success in incentivebased
verbal and maximization contests. We ask subjects to provide initial and
revised point estimates of their success rates, either hypothetically or with a scoring
rule that rewards forecast accuracy. We then passively measure the quantity and
quality of subjects’ efforts and subsequent outcomes. Bias in forecasts is evaluated at
the aggregate level as done by psychologists, but also at the individual level using
realized outcomes. We find limited evidence of excess optimism only in relative
maximization contests when encountered first, and excess pessimism or accuracy
elsewhere. Experience across contests and updating does not always increase the
accuracy of self-assessed forecasts, and even when accuracy improves biases are
rarely eliminated entirely. Methodologically, we find no evidence that a modest
quadratic scoring rule introduces moral hazard for own-outcome forecasts, but neither
does it increase forecast accuracy or lower variance.[Show full abstract]
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